Donating to charity through a tax-advantaged donor-advised fund is a modern way to give.
2020 has been a year of challenges and uncertainty. Yet despite all of the difficulties, it has also been a time of a great generosity. Charitable giving is surging to meet the extraordinary needs from those affected by the COVID-19 pandemic, social unrest, and natural disasters.
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Schwab Charitable, a public charity and one of the largest national donor-advised funds, reported a 46% year-over-year increase in dollars granted to charities during the first half of 2020. By the end of October, Schwab Charitable account holders had recommended more than $200 million in COVID-19 related grants to over 8,000 charities. And while this historic generosity has truly helped those most affected by the unprecedented events of 2020, nonprofits will need even more help as they struggle to remain sustainable and face significant budget shortfalls into 2021 and beyond.
If you want to offer a critical lifeline to the charities and causes you support, consider opening a donor-advised fund (DAF) account. These efficient, tax-smart giving vehicles are growing in popularity and help donors achieve maximum impact with their philanthropy. In fact, the number of DAF accounts tripled from 2014 to 2019.*
- See also, “Why 2020 Is An Especially Good Year to Give.”
What Is a Donor-Advised Fund Account?
A DAF account is set up in the donor’s name but managed by a public charity, known as the “sponsor.” Once the account is opened, you make an irrevocable contribution of cash or appreciated non-cash assets such as publicly traded stock or mutual fund shares and may claim a current year tax deduction. You then may invest the assets in the account for potential tax-free growth and can recommend grants to the qualified charities of your choice whenever convenient. The DAF sponsor handles all record-keeping and communication with the grant recipient. Grants can be anonymous if you like.
- Learn more about why a Schwab Charitable DAF account is a more modern way to give.
No. 1: A Tax Strategy to Help Achieve Maximum Impact
Contributions to DAFs are deductible on an itemized tax return. If you plan to take the standard deduction but are close to the threshold — $12,400 for singles in 2020, $24,800 for joint filers — you may be able to increase your tax savings by using both standard and itemized deductions with a strategy called “bunching.”
Basically, you make a contribution to your DAF account that will fund two or more years’ worth of grants to your favorite charities. That, combined with any other deductible expenses, may push you over the threshold, which would enable you to itemize in the first year. In the second year, you take the standard deduction but still have resources in your DAF account already set aside to support the charities of your choice. The combination of standard and itemized deductions may result in larger tax savings over the two-year period.
And remember, even though you made a larger contribution in a single year, a DAF account lets you make grants on your own schedule. Your favorite charities will still be able to count on your regular support.
- Use our tax savings calculator to see if a bunching strategy will work for you.
No. 2: Potentially Eliminate Capital Gains Tax
You always have the option to sell appreciated stock or other securities, pay capital gains tax on the profit, and then donate the remainder to charity. But by using a DAF, you can potentially eliminate the capital gains tax, and this could result in even more resources to support the causes you care about.
Here’s how it works. Say you have $60,000 in stock that you’ve owned for more than one year. The original purchase price of the stock (or cost basis) was $20,000. If you sold the shares, you would owe capital gains tax on the $40,000 profit — an $8,000 bill if taxed at a rate of 20%. That leaves you $52,000 to donate to charity. And if you deduct that $52,000 gift on your federal return, your tax savings would be $11,240, assuming you’re in the 37% tax bracket (deduction of $52,000 x 37% income tax rate - $8,000 capital gains tax = $11,240).
But if you contribute those appreciated shares to a DAF or another charity, you wouldn’t owe capital gains tax on the sale. That means $8,000 more for charity. And you would be able to deduct the full market value of the securities — $60,000 — on your tax return. Total tax savings: $22,200.
In fiscal year 2020, 64% of contributions to Schwab Charitable were non-cash assets, and 60% of donors surveyed suggested that they were able to give more than they otherwise would because they had a DAF account. Schwab Charitable donors contributed all kinds of assets, such as publicly traded securities, restricted stock, cryptocurrency, real estate, fine art and collectibles, private equity shares, IPO stock, and even private business interests. In this video, a self-described “tough” businessman describes how easy it is to contribute stock to his DAF.
- Discover all the non-cash options you have for tax-advantaged gifting.
No. 3: Potentially Grow Your Charitable Assets with Thoughtful Investing
Donors may recommend how they want assets in the DAF account to be invested. The invested dollars have the potential to grow tax-free over time, which means you could have even more resources for charitable support.
You typically have a choice of investment pools made up of mutual funds. Pools can run from conservative to aggressive growth. And many DAFs also offer socially responsible investing options that balance environmental, social, and corporate governance factors with financial performance.
Schwab Charitable, for example, offers 15 investment pools made up of a diverse mix of low-cost index and actively managed stock, bond, and money market funds. Donors with account balances of $250,000 or more are also eligible to have professionally managed accounts, which allow them to recommend a professional advisor to help with investing their account assets in an even broader range of investments.
- See also, “Invest for Potential Tax-Free Growth.”
No. 4: Cultivate a Family Legacy of Giving
You can pass on a tradition of giving with a DAF. When parents give to charity, about 81% of their adult children become donors themselves, according to research by Indiana University’s Lilly Family School of Philanthropy. A DAF is one easy way to share your charitable values with your family — and nurture these future philanthropists.
DAF accounts make it easy for family members of all ages to research charities online, discuss the issues that are important to them, and agree on which charities should be supported. Even young children can discover what causes they are passionate about and weigh in on grant decisions.
You can also name other family members who are 18 or older to the account so they have the ability to contribute assets and make grant recommendations for themselves and their families. And by designating successors, you ensure that others will carry on the tradition of giving through the DAF.
- Define your charitable mission — and get the family involved — with these tips.
The Simple, Flexible, and Tax-Smart Way to Give
Charitably minded investors have many ways to give. But tax-advantaged donor-advised funds provide an easy way to donate while potentially stretching your charitable dollars, so they can do the most good today and well into the future.
- See how easy it is to maximize your charitable impact with a Schwab Charitable DAF.
* Source: National Philanthropic Trust
Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund™, an independent nonprofit organization, which has entered into service agreements with certain affiliates of The Charles Schwab Corporation. Schwab Charitable Fund is recognized as a tax-exempt public charity as described in Sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi) of the Internal Revenue Code. Contributions made to Schwab Charitable Fund are considered an irrevocable gift and are not refundable. Please be aware that Schwab Charitable has exclusive legal control over the assets you have contributed.
A donor's ability to claim itemized deductions is subject to a variety of limitations depending on the donor's specific tax situation. Consult your tax advisor for more information.
Although every effort has been made to ensure that the information provided is correct, Schwab Charitable cannot guarantee its accuracy. This information is not provided to the IRS.
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This content was provided by Schwab Charitable. Kiplinger is not affiliated with and does not endorse the company or products mentioned above.
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